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Agency theory framework is a fundamental concept in management control systems that examines the relationship between principals, such as shareholders or owners, and agents, such as managers or executives, who are entrusted to make decisions on behalf of the principals. The core assumption of agency theory is that there is a natural divergence of interests between principals and agents. While principals seek to maximize their returns or organizational performance, agents may prioritize personal benefits, career growth, or risk avoidance. This divergence gives rise to agency problems, including moral hazard, where agents may take actions that are not aligned with the objectives of the principals, and adverse selection, where _______ __________ ______ _____ ______ ____ __________.
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